The capital markets regulator has notified the draft regulations for Real Estate Investment Trusts (REITs), a long-standing demand of the realty sector. This marks a key step in bringing greater transparency and professionalism in the industry.

A key funding mechanism for the real estate industry is set to become operational with the capital markets regulator Sebi notifying the draft regulations for Real Estate Investment Trusts or REITs on Thursday.

Funding has always been a major issue for the real estate sector. There are limitations to the availability of bank credit for a project, and this route is inaccessible for purchase of land, a key component of any real estate project. With formal sources of financing limited, developers have to resort to informal means such as money lenders, high net worth individuals with a huge investible surplus, private equity funds and even home buyers, who finance construction through timely payments linked to the stage of construction.

Until recently, developers also resorted to innovative practices such as the 20:80 payment schemes where home loans were clubbed with project loans that have been effectively terminated by the Reserve Bank of India.

A report by property consultant Cushman & Wakefield estimates that housing demand will touch 12 million units across India during the next five years, keeping pace with the population growth and the rate of urbanisation. Of this, the top eight cities Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, Pune and the National Capital Region would account for 23 per cent of the demand. That translates to nearly 2.5 million units. The study projects that the total supply, at the current rate of absorption would still leave a gap of 45 per cent across these eight markets.

Addressing that shortfall would call for a massive increase in housing supply, but delivery would depend a lot on the financing mechanisms in place. This is where REITs become important players.

Enter REITs

A REIT is a company that raises money from investors through an initial public offering (IPO) like any listed entity. The investors hold shares in the REIT, which uses the funds raised to buy property.

Unlike a share owned in a listed developer, a REIT owns income-generating real estate assets, which enables individual investors to earn a share of the income produced through these assets.

Individual investors will not have to invest substantial sums to buy a property. They can get the benefit of the property market by investing small sums